Welfare Economics of Labor Migration

Should the United States allow immigrants and to what extent? This is a topic of hot debate because both the economics behind it is unintuitive and everybody’s goal or preference is different.

Are low skill immigrants taking our jobs away?

This is only true for a small portion of the population, the unskilled citizens, or citizens worse skilled than the average low skill immigrants. When low skill immigrants come, the wage in low skill occupations decreases as the labor supply increases (proportionally more than the increase in the size of the economy). Low skill citizens suffer and employers (the producer) benefit from a lower cost of labor. From standard welfare analysis, we know the gain for the producers is definitely greater than the loss of the low skill citizens, resulting in a higher social welfare.

Assume that our country has an excess of higher skill labors, meaning some skilled workers accepted a lower skill job because the high skill job market is saturated or because the low skill job’s salary is attractive. But wait, could a free market be saturated? Because for each high skill job, there has to exist some low skill job to complement it. For example, each company needs customer service (a low skill occupation). If few low skill workers are available, wage will increase, attracting some high skill workers. The customer service will still exist but rather small. This assumption of excess high skill labor is reflected in the high wage of low skill jobs that attracts immigrants.

After the influx of immigrants, many high skilled citizens in low skill occupations will switch to high skill jobs as the wage in low skill jobs decreases (relative to high skill jobs). High skill jobs of course mean higher productivity. When the citizens shift to a higher skilled worker makeup, the country’s GNP (only counting citizens) is bound to increase since the total productivity increases. This resonates with the increasing social surplus I mentioned earlier. A higher productivity benefits both producer and consumer, including low skilled citizens who are worker under a lower wage.

Conclusions: if we allow low skill immigrants

Low skill citizens can be better off or worse off depending on the situation.

High skill citizens are better off

Citizens become richer, on average.

Short term dilution of capital

I ignored an effect in the previous analysis; immigrants don’t bring factory machines when they arrive. The size of the economy increases yet the the stock of physical capital remains unchanged, and therefore physical capital per capita decreases. This may drag productivity downwards initially. After physical capital accumulates to the equilibrium level in the long run, all the net change in productivity can be attributed to the change in human capital brought by immigrants. Therefore, any conclusion I make is based in the long run where physical capital is at the equilibrium level.

Is the whole country better off?

I said citizens will be richer, on average. Immigrants also live in our country; what if we count everybody? Low skilled immigrants simply lower the average national human capital and productivity, resulting in a lower GDP per capita and lower quality of life. So, ironically, our country is better off with low skill immigrants if and only if we don’t consider them as part of our country.

Is the whole world better off?

Some people prefer weighing the welfare of every human being equally. Low skill immigrants are apparently better off. I have shown the recipient country’s citizens are also better off. The originating country can be worse off if the low skill immigrants are relatively high skill within their original country, and the original country is in need of higher skill labors, which are sometimes true, but this loss should rarely happen so acutely that it outweighs the gains of the immigrants and the recipient country. The outweighing is more likely to happen if low skill workers and high skill workers are complementary factors of production. In a word, it’s very likely that the entire world is better off, on average, with low skill workers freely migrating.

Should all citizens look forward to high skill immigrants?

The United States is well-known for attracting high skilled workers from all over the world, albeit fewer than low skill workers in numbers. If it’s the opposite of what I analyzed before about low skill immigrants, most citizens should be worse off unless they are better than the high skill immigrants. However, there can be two situations in which the society surely becomes better off.

First, in some occupations of extreme labor shortage, higher labor supply exerts positive externality on related factors of productions, which is absent in countries with abundant workers. For example, alleviating the shortage in nurses makes doctors, medical equipments, and even the health care sector, more productive. This extra benefit can outweigh the loss of citizens affected by the immigration – in this case the domestic nurses whose wage lowered a bit.

Second, the United States enjoys a discounted price in hiring certain high skill workers. The US’s higher education system, for example, is probably the world’s richest, attracting preeminent scientists from all over the world. This elite is dozens times more productive than the average ones, yet the US is able to attract them by paying only 200k a year, resulting in a huge benefit. As another example, a rocket scientist from Nigeria probably finds no job in his home country regardless of the wage.

With the influx of high skill labors, the economy is bigger by having more people, but the supply of low skill workers remains unchanged. This means a higher wage for low skill workers! Now the group that suffers is the domestic high skill workers who are either living under a lower wage or have taken lower skill jobs instead. However, since they also benefit from the increased productivity provided by high skill immigrants, their net change in welfare can be positive or negative.

Conclusions: if we allow high skill immigrants

High skill immigrants in occupations with a severe labor shortage and those working under a “discounted wage” make the citizens better off.

Low skill citizens are better off.

High skill citizens can be better off or worse off depending on the situation.

Citizens are better off, on average, according to standard welfare analysis.

Is the whole country better off?

High skill workers increase the national average level of human capital and productivity. Using a similar argument as before, our country is better off with high skill immigrants if we consider them as part of our country. According the conclusions above, high skill citizens can be worse off, so our country is less better off (could be worse off) with high skill immigrants if we don’t consider them as part of our country.

Is the whole world better off?

I just showed citizens are likely better off. Obviously the high skill immigrants themselves are also better off. If they are somehow considered low skill in their home country, the home country benefits by shifting the remaining work force to a better skill makeup. If they are considered high skill in their home country, then according to the last paragraph on low skill immigrants, the originating country is worse off. To sum up, it’s very likely that the entire world is better off, on average, with high skill workers freely migrating.

Summary of How Welfare (Per Capita) Changes When Immigrants Enter

Scope of Welfare Consideration

Low Skill Immigrants

High Skill Immigrants*

Low Skill Citizens

+ or – **

++

High Skill Citizens

++

+ or – **

All Citizens

+

+

Immigrants

++

++

Everyone Living in the Recipient Country

–

++

Everyone Living in the Originating Country

+ or – ***

+ or – ***

Everyone in the World

Very likely +

Very likely +

*Does not include those in occupations with labor shortage and those with discounted wages.

**Depends on (1) whether immigrants are better skilled than this group of citizens and (2) whether the increase in productivity of high skill workers is large enough.

***Depends on (1) the labor skill distribution in the originating country and (2) the complimentarity of the skills of the immigrants and that of those still in the originating country.

Note that in the column for low skill immigrants, both citizens and immigrants are better off after immigrant influx, yet the combined average welfare goes down. This is because even though low skill immigrants are better off, they are still less productive than the nation, thus pulling the national average down when combined.

Points to note

Depending on how the wealth in the economy is distributed, immigration could make most people worse off while increasing GDP per capita and income inequality.

The model I discussed does not consider that immigrants often send money back to their home country, benefiting the home country and hurting the immigrant receiving country.